1 Chapter 2 Financial Statements and the Annual Report Financial Accounting, Alternate 4e by Porter and Norton

2 Primary Objective of Financial Reporting Invest?? Borrow $$?? Sell stocks or bonds?? Start new business?? Loan $$?? Extend credit $$?? Provide information for decision making

3 Secondary Objectives of Financial Reporting Assess investor/ creditor cash receipts A FEDERAL RESERVE NOTE THE UNITED STATES OF AMERICA L F 12 L F ONE DOLLAR WASHINGTON, D.C. THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE SERIES 1985 H 293 Assess cash flows to company A FEDERAL RESERVE NOTE THE UNITED STATES OF AMERICA L F 12 L F ONE DOLLAR WASHINGTON, D.C. THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE SERIES 1985 H 293 Assets = Liabilities + OE Reflect resources and claims to them

4 Qualitative Characteristics Understandability - Relevance - Reliability - To those willing to take the time to understand it Represents what it purports to Has capacity to make a difference

5 Qualitative Characteristics between companies Comparability from one period to the next Consistency

6 Qualitative Characteristics Materiality Conservatism All else equal, choose least optimistic alternative Will it make a difference to the decision maker?

7 Typical Operating Cycle CASH Time it takes to go from cash back to cash A FEDERAL RESERVE NOTE THE UNITED STATES OF AMERICA L F 12 L F ONE DOLLAR WASHINGTON, D.C. THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE SERIES 1985 H 293 INVENTORY A FEDERAL RESERVE NOTE THE UNITED STATES OF AMERICA L F 12 L F ONE DOLLAR WASHINGTON, D.C. THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE SERIES 1985 H 293 ACCTS. RECEIVABLE A FEDERAL RESERVE NOTE THE UNITED STATES OF AMERICA L F 12 L F ONE DOLLAR WASHINGTON, D.C. THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE SERIES 1985 H 293

8 Basic Structure of a Classified Balance Sheet Current assets + Noncurrent (long-term) assets Total assets Current liabilities + Noncurrent (long-term) liabilities + Stockholders’ equity Total liabilities and stockholders’ equity

9 Monaco Coach Corporation Consolidated Balance Sheets Assets Dec. 29, Dec. 28, A A = L + SE (in thousands) Realized, sold or consumed in one year or operating cycle Current assets: Trade receivables, net $ 82,885 $ 116,647 Inventories 127, ,609 Resort lot inventory 0 26,883 Prepaid expenses 2,063 3,612 Deferred income taxes 27,327 33,379 Total current assets 239, ,130 Notes receivable 8,157 0 Property, plant and equipment, net 122, ,350 Debt issuance costs, net Goodwill, net 55,856 55,254 $ 427,098 $ 547,417

Current liabilities: Book overdraft $ 5,889 $ 3,518 Line of credit 26,004 51,413 Current portion of long-term note payable 10,000 21,667 Accounts payable 66,859 78,055 Product liability reserve 19,856 21,322 Product warranty reserve 27,799 31,745 Income taxes payable 0 4,536 Accrued expenses and other liabilities 19,249 29,633 Total current liabilities 175, ,889 Long-term note payable 30,000 30,333 Deferred income taxes 8,312 14,568 Total liabilities 213, ,790 Liabilities and Stockholders' Equity Stockholders' equity: Common stock Additional paid-in capital 48,522 51,501 Retained earnings 164, ,837 Total stockholders' equity 213, ,627 $ 427,098 $ 547,417 = L + SE A = L + SE Monarch Coach Corporation Consolidated Balance Sheets Satisfied within one year or operating cycle 10

11 Analysis of Liquidity Of particular interest to bankers and other creditors Current Ratio Working Capital Ability of company to pay debts as they come due

12 Monaco Coach's Liquidity Current assets $239,350 $356,130 Current liabilities 175, , (in 000’s) Working Capital = C.A. less C.L. $ 63,694 $ 114,241 Current = Current Assets 1.36:1 1.47:1 Ratio Current Liabilities What's the trend??

13 Comparison of Liquidity Some 2002 current ratios: l Gap, Inc.2.11:1 l Sprint0.78:1 l McDonald's0.71:1 Can you compare the ratios? Consider composition of current assets and frequency of turnover

14 Income Statement Revenues$$$ Less: expenses($$) Net income $$ Single Step

15 Sales – Cost of goods sold = Gross profit Operating expenses: – Selling expenses – General and administrative expenses = Income from operations +/–Other revenues and expenses = Income before income taxes – Income tax expense = Net income Four important subtotals Multiple-Step Income Statement

16 Net Sales $ 937,073 $1,222,689 Cost of sales 823,083 1,059,560 Gross profit 113, ,129 Selling, general and administrative expenses 70,687 87,202 Amortization of goodwill Operating income 42,658 75,927 Other income, net Interest expense (2,357) (2,752) Income before income taxes 40,635 73,280 Provision for income taxes 15,716 28,765 Net income $ 24,919 $ 44,515 Monaco Coach Corporation Consolidated Statements of Operations For the Years Ended

17 Analysis of Profitability Gross Profit % Profit Margin % Of particular interest to current and potential investors

18 Gross Profit (Margin) % = Gross Profit Sales (How many cents on every $ of sales are left over after covering the cost of the product) Monaco Coach Corporation's Profitability (in 000’s) Net sales $901,890$937,073$1,222,689 Cost of sales 772, ,083 1,059,560 Gross profit$129,650$113,990$ 163,129 Gross profit % = 14.4% 12.2% 13.3%

19 Profit Margin % = Net Income Sales (How many cents on every $ of sales are left over after covering all expenses) (in 000’s) Net sales $ 901,890 $937,073$1,222,689 Net income $ 42,521 $ 24,919$ 44,515 Profit margin % = 4.7% 2.7% 3.6% Monaco Coach Corporation's Profitability

20 Statement of Stockholders’ Equity l Shows changes in all equity accounts including: » Sales and purchases of capital stock Statement of Retained Earnings Beginning retained earnings Add: net income Deduct: dividends = Ending retained earnings Includes:

21 Cash flows from operating activities: $$ Cash flows from investing activities: $$ Cash flows from financing activities: $$ Net increase in cash $$ Cash at beginning of year $$ Cash at end of year $$ Basic Format of the Statement of Cash Flows Reconciles change in cash for the period

22 Cash flows from operating activities: $$ Cash flows from investing activities: $$ Cash flows from financing activities: $$ Net increase in cash $$ Cash at beginning of year $$ Cash at end of year $$ Basic Format for the Statement of Cash Flows Involve the purchase and sale of products or services Involve the acquisition and sale of long-term assets Involve the issuance and repayment of long-term liabilities and stock

23 ü Report of independent accountants ü Management discussion & analysis ü Summary of financial data ü Letter to stockholders ü Financial statements ü Notes to financial statements Elements of an Annual Report

24 End of Chapter 2